Welcome to San Diego Blog | February 15, 2018
3 Types of Investors Who Might Benefit From Owning Turnkey Rentals
Guess what? Turnkeys aren’t for everyone. But guess what else? They are perfect for some people.
There is much debate about whether or not buying a turnkey rental property is a smart investment. The primary argument that comes up against turnkeys is that they are sold more or less at market value, so you can’t force appreciation on them, and being able to do that is the crux of rental property investing success.
I will say that forcing appreciation—buying something under market value and then doing something to increase that value—is one of the most solid ways of profiting on an investment property. It may even be the most solid way to profit. But the reality is there is a certain level of work, effort, skill, and risk that goes into doing the things to a property that will force that appreciation (assuming you aren’t just using the market by itself for appreciation).
Turnkeys offer you a property where all of this work has already been done, and therefore very little of your time is required to invest in the property. While you will then pay closer to market value for the property because you aren’t the one forcing the appreciation, you also aren’t required to invest all of that work, effort, skill, or headache into the property. You can also still be plenty profitable with the property if you buy right and manage your investment right.
So, obviously, there is a debate going on. Should you buy turnkey or not?
Before I continue, I do want to offer you some more information on this idea of doing the work to force appreciation for yourself versus going the turnkey route. I encourage you to read “Is It Better to Buy & Rehab or Purchase Turnkeys? Let’s Look at the Pros & Cons.” This article will give you a more in-depth discussion about the specifics of the two options, and it will even start to hit on who may fit better into which category.
Then to expand on that, let’s talk about who specifically turnkeys are perfect for! Of course, anyone can decide to buy a turnkey and it can be a great investment, but here are three groups of investors who I believe would benefit from turnkeys.
3 Types of Investors Who Might Benefit From Owning Turnkey Rentals
1. New Investors
As with just about anything in life, you will always be better at something if you first learn the fundamentals. It’s like learning to crawl before you learn to walk, skiing on the bunny slope before diving down a black diamond run, or learning to tread water before learning the butterfly stroke or the high dive. It can no doubt be frustrating to start slow and spend time focusing on the basics, but in the long run, you’re much more likely to succeed not only more smoothly but to much higher levels.
It’s all about building a solid foundation.
In my opinion, buying a turnkey rental property is a perfect way to learn the fundamentals of real estate investing. There are a few things that, no matter what investment strategy you decide to go with, you need to know and use on a regular basis. All real estate investments use them, require them, and rely on them. If any of these are lacking in your arsenal of investing skills, you could be in for a world of hurt.
Duh, investing is all about the numbers. So if you can’t run numbers on a property you are analyzing, what are you really buying into? The idea that something might be profitable? Please don’t do that. There are very few investment strategies where you could get away with not understanding how the numbers work. Turnkeys are no exception to the numbers game. They are, however, a chance to learn the most basic understanding of numbers before you have to learn to work numbers on much more complicated investments. Once you understand how to run numbers on a simple property like a turnkey, you can then use that as your numbers foundation, so to speak, and then slowly add in more complicated paths. But at least you have established that solid foundation.
If you’re curious what running numbers on a basic rental property looks like, check out “Rental Property Numbers So Easy You Can Calculate Them on a Napkin.”
You’ve got to know the market you are investing in. You need to know why you are investing in that market. You need to know the risks of that market. Why? Because those aforementioned numbers depend on it. While there are a lot of markets I don’t personally agree with, I support anyone buying anywhere they want as long as they can explain to me why they are buying there. Even if I wholeheartedly disagree that buying in a particular place is a bad idea, if you can acknowledge to me that you know the exact risk(s) of buying there, then I will totally stand behind you.
For example, the most basic of market analysis questions is—is the market you are looking at a growth market, a stable market, or a declining market? If you can’t tell me that, I don’t think you have any business justifying a particular market. Turnkeys, at least the ones from turnkey providers, are almost always in cash-flow positive markets—meaning they are in markets that have price-to-rent ratios supportive of positive cash flow. Of those cash flow markets, I can promise that not all turnkey providers are in growth markets. I believe that some are, in fact, in declining markets. I personally don’t advocate declining markets, but again, if you can intelligently explain to me that you understand the risks of buying in declining markets and you acknowledge that you are pursuing a declining market, I’ll totally support you! Because turnkeys are available in both of these types of markets, they are a great way to teach you how to differentiate the types of markets out there and what factors to look for in a solid investing market. Even if you decide to flip later—and flipping markets can be very different than rental property markets—you are still going into it with a working knowledge of market analysis.
Go ahead and mark this down as one of the most important phrases of your investing career. Everything you are told, everything you are quoted, every person you hire needs to have due diligence run on it. Some things require less due diligence than others, but you absolutely have to have a working understanding of how to do due diligence when it comes to investing. Turnkeys are the perfect thing to teach you this because, almost literally, your only job when buying a turnkey is to do due diligence on the property you are buying. Because you aren’t rehabbing or getting quotes or swinging hammers or finding tenants or any of the other detailed work that goes into a property, this opens you up to have to do absolutely nothing else other than due diligence. Learning how to do this level of due diligence will help you perform more complicated due diligence as you advance through the investment ranks.
Because turnkeys are typically managed by property managers, you gain an opportunity to learn how to “manage the manager,” as I like to say. Much like with due diligence, managing the manager is an overseeing of sorts. When you are doing due diligence, you’re doing things from the 25,000-foot view rather than being down in the weeds. When you are managing a manager and managing the general flow of your property, that too is from the 25,000-foot view. Turnkeys aren’t always perfect, and once you own them, they are truly just like any other rental property, so you begin to learn things about the effects of bad tenants, the flow of the management, decision making, problem solving, and eventually exit strategies. All of these skills are foundational to any type of investing. And because you aren’t busy fixing toilets for your tenants, you have time to clearly learn these things and carry them on with you throughout your investing career.
If you want to check out a fairly entertaining article (if I do say so myself) on the difference between investing in something more simple like a turnkey versus going hardcore into the more advanced types of investing, and/or if you like snowboarding, check out “What Snowboarding Can Teach Us About Real Estate Investing Strategy.” You may get a clearer picture on the opportunity to learn the basics before you take on the harder stuff!
2. Side-Time Investors
This refers to the person who doesn’t want a career in real estate. Maybe they have a full-time job they love, maybe they have a family they are busy with, or maybe they are like me and would prefer to travel and lay on the beach than swing a hammer. This group of people just doesn’t want to expend a crazy amount of time or effort into real estate investing. They do, however, want to do something smart with their money. Turnkeys are excellent for this. As I said in earlier paragraphs, your main jobs as a turnkey investor are understanding numbers and markets, due diligence, and managing the manager. These things are fairly easy to learn if you take the time and practice them—and once you learn them, you’ve learned them. They aren’t as drastic as figuring out how to initiate and conduct a rehab, for example. They can be learned in short amounts of time, and the on-going learning of them is on the minimal side. This way, you are free to go about your life outside of your investments, all while still seeing good returns on your money.
3. Hands-On Investors—to Fill the Gaps
I’d say this one is the least talked about of them all. Everyone knows turnkeys are advertised as hands-off (which isn’t totally accurate, but they are certainly relatively minimal for time investment), and there have been discussions about the benefits of being able to learn the basics through something like a turnkey investment for the new investors. But I’ve not heard many people talk about why more experienced investors can benefit from turnkeys as well.
Typically, I don’t recommend turnkeys for anyone who is willing, able, interested in, or skilled in doing things on their own. If you can and want to do it on your own, do that. There’s more money in that. And for the most part, anyone who is already doing things on their own or has the interest in doing so isn’t going to be entertained by what a turnkey offers, and it may even bother them or stress them out. There are several reasons why most experienced or handy investors want nothing to do with turnkeys.
However, there is one exception to this that I think is worth throwing out.
Let’s say you are a BRRRR-er or a flipper in your local town. That’s great! That’s the dream investment scenario for most. So you are trucking along, buying the distressed properties, rehabbing them, selling them or renting them out, possibly landlording them, and that’s your gig, fantastic! But there’s one hitch in all of it that some people do want to do something about—only being able to invest so fast.
Think about it. If you’re busy buying a distressed property and then rehabbing it, your resources (mainly you) are tied up in that one property for a decent amount of time. You can’t buy more or move faster because you only have so much ability when you are doing things on your own. You can, of course, start hiring out more and more and build systems so you can work yourself out of being a required part of the equation, but a lot of people don’t want to be outside of the equation. They want to be in it—that’s half the reason they are doing it in the first place. But let’s say that while you’re busy with that property and then with the next property, you have money sitting around that is doing nothing because you can’t move fast enough to keep it all in flow. It’s a good problem to have, I admit. But it’s still money sitting around doing nothing.
If you can’t buy distressed properties and rehab them properly faster than you already are and you have money sitting around doing nothing, turnkeys are an excellent option to fill the gap.
For someone who successfully invests locally and rehabs themselves, turnkey can feel almost like a repulsive idea and an insult to your skill. I totally hear that. But I’ve started hearing from more and more experienced investors who are buying an occasional turnkey, just to be sure all of their money is working positively for them. It makes sense—inject a turnkey here, another turnkey there on occasion, all around what you are doing locally. It’s the perfect scenario. It’s diversification, it’s keeping all of your money busy for you at all times, you can sell your turnkey not too far in the future if you want the funds to help a local investment, but you were at least collecting cash flow on your money instead of it sitting around gaining you zero!
To Turnkey or Not to Turnkey?
The good news is there’s no right answer. Turnkeys are great for who they are great for and hated by others. At the end of the day, the only thing anyone should ever decide is what is right for them personally. What is right for one person may not be right for another. We all have different goals, different interests, and different skill sets. No one but you can decide what investment strategy is best for you and only you.
So what is it? Do you fall into any of these categories and think turnkeys might be right for you?
Source: Bigger Pockets